Amazon in China

Amazon entered China in 2004 when the Chinese economy was in a rapid phase of growth. While
the e-commerce market was small, it was expected to grow and become one of the world’s
largest markets. Amazon entered by acquiring Joyo.com, the largest Chinese e-tailer of books and
music, for a price of $75 million. By then, Alibaba, founded by Jack Ma, had not become too large
to be formidable. In fact, Alibaba had made a profit of $1 just a couple of years back. The largest
e-commerce firm back then was eBay-Eachnet (an acquired entity of eBay) with the largest seller
base.
eBay-Eachnet offered an auction-based e-commerce platform and had a first mover advantage.
However, at the time, Chinese consumers were not too comfortable with the online auctions.
Picking on the pulse of the market, Alibaba launched Taobao as mainly a marketplace to connect
sellers with buyers, instead of an online auction format. In addition, the buyers and sellers could
communicate over text messages and phone calls to understand product features and ensure
product quality and delivery. Additionally, while eBay preferred to advertise over the Internet,
Alibaba went all in and advertised in the traditional print media as well as television, since
majority of the Chinese consumers were not frequently online in early 2000s. What eBay missed,
Alibaba picked up, and increased its registered sellers. In 2008, Alibaba launched Taobao mall to
finally monetize its business model by charging the sellers transaction fees and advance annual
deposits. The annual deposits would cover service charges as well as act as an insurance in case
the seller reneged on delivering the product to the customers.
Alibaba deserves the credit of changing buyer behavior by encouraging the Chinese buyers to
increase their online spending. Its promotional events such as singles’ day on every 11th
November radically increased its popularity and revenue by 2009. It also patiently worked with
the smaller sellers to get them to aspire for quality which the buyers demanded for purchasing
online without seeing the actual product. The firm worked with the logistics partners by investing
to improve their product handling skills and delivery timelines. Soon, the firm blanketed the
entire country using partnership model instead of in-house logistics.
As Alibaba was expanding its presence in the B2C marketplace, Amazon was slowly acclimatizing
with the business environment of an emerging market. It operated under Joyo’s brand name until
2007, and used its three fulfillment centers in Beijing, Shanghai and Guangzhou before building
any new centers. Amazon wanted to bring in its inventory management and order tracking
systems to replicate its US business model as much as possible. However, the logistics remained
problematic and unpredictable due to China’s poor road networks and traffic congestions,
making inventory management a nightmare. Following Alibaba’s logistics model, Amazon
outsourced deliveries destined to tier-2 cities. However, it directly catered to tier-1 cities where
Joyo’s fulfillment centers were already present. Slowly increasing its investment in the country,
Amazon opened more warehouses and fulfillment centers covering the entire country by 2011.
It also started handling its own last-mile deliveries in most of the cities by introducing motorbikes
and scooters instead of vans or trucks.
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In the early days of e-commerce, Chinese consumers were reluctant to pay in advance and online.
There were several cases of fraud where the customer made the full payment but did not receive
a product, or received a faulty or counterfeit product. Alibaba handled it by repaying the
customer using the seller’s annual deposit account. For larger orders, Alibaba would use an
escrow account, which would hold a customer’s payment until the products were satisfactorily
delivered by the seller, and would release the amount to the seller once the customer confirmed.
Amazon handled this problem differently, by introducing cash-on-delivery option. Further, to
gain market share, Amazon provided free shipping to the customers. To attract more sellers,
Amazon only charged transaction fee in the form of commission, unlike transaction fee and
annual deposit charged by Alibaba. Putting to use its big data skills, Amazon began tracking prices
of similar products, sold by Alibaba and others. It even refunded the price difference to the
customers for first couple of years in case a lower price was discovered from its competitors.
These strategies certainly gained attention of the Chinese consumers with Amazon China
becoming one of the widely visited e-commerce websites by 2011. However, the consumers
continued to perceive Amazon as a bookseller rather than a one-stop-shop for all their needs,
due to limited product variety. Despite the early efforts to attract sellers, Amazon could not retain
them. The reason was its matter-of-fact approach toward sellers when they received a negative
feedback. Amazon’s algorithms were designed to flag a seller if it received negative comments
that were more than 1% of the total comments. Instead of investigating the reasons behind
negative comments, Amazon algorithms would automatically remove the sellers once this
threshold was reached. At times, these comments would be written by competitors just to shut
down a seller. At other times, the customers rated a seller negatively for reasons other than the
actual product. The closure decisions were considered final and Amazon management was quite
adamant about this policy. Another point of disagreement between the sellers and Amazon was
how the firm treated the retailers of branded products. Chinese law allowed sellers to sell
products without a direct consent of the product manufacturers and the brand owners, treating
the sellers as retailers of the brand. While this was a common practice and accepted by the
Chinese law, Amazon applied its US ideologies and closed the sellers automatically in case they
failed to provide a direct consent from the manufacturer and the brand owner. These policies
created a major dissent among the sellers and some of the larger sellers simply exited Amazon’s
platform.
Unlike Alibaba, Amazon did not invest in print advertising but dealt in online advertising. Its
webpages were designed following the American template consisting of ordered rows, smaller
photos, and a cleaner look. Its Chinese competitors, particularly Alibaba, provided lot of
information on one page, with sidebars, flying promotions and dancing GIFs, as well as seller-
specific webpages that the sellers could design. While Amazon China team requested the US
headquarters to allow them to make changes to the template, the headquarters refused citing a
scientific study on information overload in human brain.

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The end result of these and various other decisions was a small market share of 1.6% in 2016 as
compared to Alibaba’s undisputed leadership with a market share of over 51%. In an attempt to
gain greater share of customer’s wallet, Amazon integrated its Chinese operations with the UK
and the US operations, and launched Amazon global store where Chinese consumers could order
products available in the foreign markets despite the price markup. Amazon not only delivered
these products on an order-by-order basis but also stocked popular items in customs’ holding
warehouses on main Chinese ports and offered a three-day delivery. While these attempts
pushed up the total revenues slightly, they could not increase the domestic sales, which are a
major revenue source for any online retailer.
To make matters worse, e-commerce industry started becoming more and more global with
Alibaba entering Europe and Australia in 2014. It also created a cloud computing research center
in Silicon Valley with an ambition to improve its web service offerings. It strengthened its existing
export operations to the US whereby Chinese sellers could directly connect with American
customers, first in the B2B space with plans to launch a B2C service. Further, in 2016, Amazon’s
home competitor Walmart acquired a minority stake in the second largest Chinese e-tailer (after
Alibaba), with plans to increase Walmart’s presence in the country using an omni-channel
approach. Amazon ended 2018 with a market share of less than 1% and finally closed its
marketplace in July 2019. It instead opened a store on another Chinese e-commerce site called
Pinduoduo in November 2019 to continue Amazon global store operations.
Question: Explain Amazon China’s lower market share using AAA framework